Crypto Market Crash? What happened with FTX? The short story is that crypto tycoon Sam Bankman-Fried the company he founded, FTX.
The crypto market crash explained and FTX’s scam revealed
Today, we start big. Take your time, sit down, and relax while reading this article! All you need to know is explained in an easy way and is ready to be understood.
What happened to FTX?
To reply to this question, we have to take a step back and explain how the mechanism works and add a few details about how the financial world operates. What happened to FTX is the same principle used to understand what is going on with the FED, the Bank of Japan, and all other central banks in the world.
Let’s start from the beginning:
FTX owner is Sam Bankman-Fried; you can look up everything you want to know about him on the internet; we’re not going to talk about who he is, but rather what he did. What you don’t know is that he’s the owner of Alameda too, and this is a very important detail.
What is FTX?
FTX is a cryptocurrency derivatives exchange launched in 2019. The company is based in Hong Kong and has offices in San Francisco. The exchange offers futures and options on a variety of cryptocurrencies, as well as leveraged tokens that provide exposure to the underlying assets with leverage. FTX also offers a range of other products, including indices, theme baskets, and an over-the-counter trading desk.
What is Alameda?
Alameda is a research-driven quantitative crypto asset manager founded in early 2018. Alameda’s mission is to bring institutional-grade financial engineering to the crypto markets.
Said like this, you don’t understand what it is and what it does, right?
So, more simply, Alameda’s purpose is to move the market, to make the price go up and down, and to speculate on the market. Yes, you read it well. Their “job” was to “trick” the perception of the value by moving the price of the tokens, making investors believe this was worth the investment, and selling the tokens in the market to real investors at a higher price.
Now it’s time to explain finances.
What factors influence the price?
Let me give you a simple example. If you go to buy a house, the price is determined by standard criteria ( locations, square meters, date of construction), but you always make a lower proposal until you find a price agreement for that moment at a specific time. The key point is time. If you want to know more, google “demand and supply.” On the stock exchange, the price is determined in the same way. To make it simple for you to understand, let’s say that if there is more demand than an offer, the price will go up, and if there is more offer than demand, the price will go down.
Sam Bankman-Fried created a huge demand by buying all the tokens available on the market, with his company Alameda driving up the prices. When he thought it was enough, he sold all his tokens on the market at a higher price, making a lot of money. This process is called “pump and dump” and is illegal in the traditional financial world.
What happened to FTX?
What happened is that Sam Bankman-Fried used Alameda’s money to manipulate the FTT price. FTT is the token created by FTX. Here is where it becomes interesting because this is not illegal if you do it for your own benefit. What he did instead is that he used Alameda’s money to buy FTT tokens from the market, driving the price up, and then he sold his stash of FTT when the price was artificially high due to his manipulation.
The atomic bomb of the fraud exploded on November 2nd when FTX’s balance sheet leaked in an article posted on CoinDesk. Until now, no one knew about the empire of Sam Bankman-Fried and how it operated, but now the operations between the two companies, FTX and Alameda, are public.
Alameda had listed $14.6 billion in FTT on its sheet.
FTX creates the token. FTT
Alameda creates value from thin air.
FTX claims its company value is $32 billion.
Balance sheets leaked
Alameda’s assets are valued at $14.6 billion in FTT.
The Ponzi scheme is revealed, and when the fraud is made public, sharks attack!
FTX was the world’s second-largest exchange until CZ (founder of Binance, the world’s largest exchange) fired the first shot. With a tweet, CZ announced the company’s exit from any FTT assets: He delisted all of FTX’s tokens from Binance, and the price of FTT dropped 60% in one day. Technically, in financial terms, this means that after CZ’s tweet, all the people holding FTT started to sell at any price just to get out in time. Plus, the shorter came in, amplifying the downward trend effect. In this scenario, FTX is the only buyer on the market, trying to push the price up again. But the selling pressure was too high, and the price went down.
Then, the CEO of Alameda stepped out with a tweet, saying to CZ, “If you want to minimize the market impact, we can buy all the FTT at $22 today.”
Points to understand:
If you want to sell or buy a large asset without impacting the price, you do it privately, not in public.
Why were they using a Twitter account, and why was the price $22?
This is, as I call it, “the last desperate attempt to save the boat with a suicide and not succeed.”
By doing this, Alameda tried to stop the “bleeding” of the downtrend; in fact, they created a psychological support level where the price stopped; see the chart https://www.coingecko.com/en/coins/ftx-token.
At the same time, they committed suicide, exposing the call margin.
What do you think will happen when the support line breaks?
The inevitable. The downtrend started again, and right now, as I’m writing to you, the price is $1.44.
How can FTX defend the price?
They had CZ and the market running away from FTT, plus the shorters piling up 19 million contracts against them. They have no choice but to drain all of their reserves. Plus, if the price keeps going down, they will have more margin calls and will need to sell even more assets to meet them, but they don’t have any money! It is a vicious circle from which there is no escape.
Crypto Market Crash & Financial understanding:
Now, as you saw in the micro-case, let us apply this concept to Japan. The central bank of Japan created Yens out of thin air. The same as FTX did with FTT In the same way, the price of the yen was set by decree. The central banks are the only buyers of their currencies and bonds. The price of the yen is dropping because nobody wants to hold it for several reasons ( inflation, insolvency, etc.) So, what is Japan up to? The same thing FTX did. Buy them all back, trying to keep the price up. And in the same way, they sold all their assets in USD to cover the fall of the price. The problem arises when Japan doesn’t have any more assets and collateral to cover the price of the yen.
Do you see the concept applied in a bigger scenario?
Now, what do you think is happening to the Bank of England and the FED?
Is it the same exact situation?
The FED is buying USD to prop up the price. They are selling their assets in other currencies to have enough cash.
What will happen when they don’t have any more assets and collateral?
The same as FTX, the system will collapse and we will enter a deflationary spiral from which there is no escape!
When you buy a product ( car, food, service, etc) you automatically become shorter as you don’t want to keep the money but instead want the goods, and the FED is forced to buy the money back to keep the price of the USD up.
That’s how it works on a global scale!
A global money shortage will destroy the system.
Thanks for reading! Hopefully, my writing was exhaustive and understandable.
As always, do your own research and stay updated with news and situations as soon as they come out!
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Have a great day and see you soon in the next article!
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